FTA's - is it the way forward for Sri Lanka?

Rohantha N. A. ATHUKORALA

FREE TRADE: Free Trade Agreements (FTA's) with neighbouring countries and other nations is making the small -scale industry's in Sri Lanka jittery not because of the duty cuts and the products from larger countries freely coming into the country at penetrative pricing, but, there are problems concerning inverted tariff structures, rules of origin and ambiguity in the definition of raw material and intermediate/finished goods and the non tariff barriers that are being practised by some countries.

If we take Sri Lankan only a 2.68% of the quota to India was utilised. I believe the time has come for one to do a critical review of the current FTA's in progress and set up annual review so that the FTA will be a dynamic economic partnership based on the changing global landscape of the world.

There are many other factors that needs an indepth analysis and course correction to help Sri Lankan companies benefit greater from FTAs. Let me share some of them.

Equally competitive

Not surprisingly, under the FTA between two developing countries, there could be a number of items in which both countries are equally competitive.

            SRI LANKA’S EXPORTS OF TEA TO INDIA

Green Tea		7.26	2.1	30.68	8.37
Black tea
(packs not
exceeding 3 kg)		101.18	43.65	96.79	37.8
Black Tea - bulk	290.46	64.39	302.72	58.87
Instant tea		4.7	0.25	-	-
Total			403.6	110.39	430.19	105.04
Quota utilization in 2005 - only 2.68% 
Source; Sri Lanka customs

In the Sri Lanka -India FTA, for instance, sectors like Tea, Pepper will lead to a trade lock as both are equally strong in the world market.

In some cases to protect domestic industry there can be lopsided trading that can affect continuity. In the Indian-Thailand FTA agreement, the likely sectors to be effected can be automobiles, Gems and Jewellery.

From a top line analysis if we look at the import, export balance in the FTA between Sri Lanka and India it is evident that a closer look is required on which sectors there is this factor of 'Equal competition' so that a more beneficial model can be arrived at.

In 1999 Sri Lanka exported products for the value of 3.4 billion dollars, whilst in 2005, Sri Lanka achieved a staggering export value of 56.2 billion dollars with India.

However, the imports from India exceeded 144 billion dollars in 2004. With this data it is clear that unless we analyse the details and carve out the items that are equally competitive, Sri Lanka will continue to grow in double digit percentage but the merchandise from India will continue to soar into the Sri Lankan market.

The FTA agreement with countries like India, cutting duties from 28% to 2% over a four year period is sure going to marginalise Sri Lankan enterprise.

The trade gap has narrowed but the pace that Sri Lanka is keeping is far too slow to the aggressive trading, economic partnerships, mergers and acquisitions that corporate India is showcasing to the world.

Reactive time

Apart from lower input costs, the other aspect that will effect FTA agreements to countries like Sri Lanka is the flexible laws.

Export Performance by Regions (In US $ 000’s)

			2004	% Share	2005	% Share	% Growth
NAFTA			1974.89	34.30	2101.36	33.12	6.40
EU			1760.69	30.58	1808.43	28.51	2.71
SAARC			498.52	8.66	642.56	10.13	28.89
Middle East		383.54	6.66	327.63	5.16	-14.57
Other Asian countries	242.72	4.22	273.27	4.31	12.58
CIS countries		193.35	1.06	195.22	1.11	0.96
African countries	60.96	3.36	70.39	3.08	15.46
Others			642.33	11.16	925.14	14.58	44.02
Total			5757.00	100.00	6344.00	100.00	10.19

Source: Sri Lanka Customs, Central Bank of Sri Lanka

In countries like Vietnam the flexible laws helps an organisation change to the changing consumer requirements faster. I strongly feel those areas that Sri Lanka must open its doors to FTA as the benefits to the economy outweighs the challenges it offers.

However, whilst decisions need to be taken keeping in mind the larger picture, sectors which provide considerable employment and are vulnerable should be kept out of the agreement. One area is the apparel sector which provides employment to over 350,000 Sri Lankans.

This sector is vulnerable and needs protection so that we can drive the US and UK markets with the 'Garment without guilt' platform and there by Sri Lanka be known to a select clientele in those markets.

However, the FTA looming out between the EU and China, will be an economic landscape change that will sure effect the Sri Lanka's strategy.

Tariffs changes

A FTA must also provide for tariff structures to be inverted if the duties on finished products are brought down under the FTA agreement, whilst those on raw materials and intermediate goods that go into the production of these goods remain at high levels. If not SME's are rendered uncompetitive, compared with those countries with low duties on raw materials or if its home grown.

Uniform duty

When FTAs are discussed the focus is more on the finished product and low priority is given to the raw material. In some instances powerful lobbies from large raw material manufacturers, primarily large companies, the raw material is pegged at very high levels, whilst the finished product would attract zero duty on under the FTA by 2008.

The only way forward is to have a uniform rate of duty for all products, with the lowest possible slab of 5% or 8%. One needs to have simple procedures and remove discretion or discrimination that can hurt the SMEs.

This can also help the key issue in our part of the world where porous borders exist. Studies carried out by ICRIER and other key trade bodies have revelled that the magnitude of such parallel trade in goods is depriving the exchequers of SAFTA members.

One way out is to sufficiently incentivise actors engage in parallel trade, to trade their products using legal channels. The other way is to create a trade facilitating architecture that can arrest such parallel trade.

Raw materials

Even a bigger challenge lies clearly defining what qualifies as raw material, immediate and finished products. Such ambiguities in definitions is one of the loopholes generally used by some powerful lobbies.

Recently the problem of rules of origin, weighed heavily on the SMEs. Depending on the partner country, FTAs has different clauses under rules of origin with regard to amount of value addition that qualifies a product to be of the same origin as the country with whom the FTA is being signed.

Rules of origin

To my mind every bilateral treaty brings with it innumerable procedures surrounding rules of origin and tariff reductions.

These become the biggest entry barrier to new markets. A typical small manufacturer would, therefore, have to go through hundreds of clauses and conditions to really understand the impact of FTAs or to gain international access.

Given this backdrop, care will have to be taken so that rules of origin so not become a disguised barrier to trade facilitation in the region, whilst at the same time, are not flouted at the cost of the industry.

One way out is a multilateral treaty under WTO that holds for large number of countries may be the ideal solution.

The WTO

There are some systems being developed by countries where a mechanism to gauge the impact of duty change of raw materials on finished goods and vice versa.

I feel this should be developed and available on line so that there is transparency and drive open trade among SMEs in stronger platform.

I also feel that an FTA should be developed on an economic interest than a political footing whilst the recent thrusts we see where there are FTA's being eyed between Canada and Sri Lanka and also Bangladesh is because the slow progress of WTO in forming a consensus for multilateral agreements.